A company\'s net earnings are 18 million USD and they are expected to stay on th

Question

A company's net earnings are 18 million USD and they are expected to stay on the same level indefinitely. There are 4,8 million shares outstanding and the P/E-ratio is 12,5%. The company buys back 192 000 shares and cancels them. What are the effects on the share price and P/E-ratio when:
a.) The company has no debt and does not want to acquire any in the future either. There is no excess cash and the company needs to sell some of its profitable investments to cover the costs of buying back the shares.
b.) The company has no debt and no excess cash. It acquires debt with an interest rate of 6% to cover for buying back the shares.

Explanation / Answer

here outstanding shares has given 4,8 I taken it is a 4.8 million shares.. Current EPS = Total earnings / Number of shares = 18 million / 4.8 million = $3.75 PE RATIO = 12.5% GIVEN ,Actually it is meaured in times = 12.5times Current market price =PE Ratio * EPS = 12.5*3.75 =$46.88 a) if company does not get any finance from outside ,then no deductin will be effect on its net earning .With this condtion If the company buy back its 192000 shares then , a) if company does not get any finance from outside ,then no deductin will be effect on its net earning .With this condtion If the company buy back its 192000 shares then , EPS = 18 Million / ( 4.8million -192000) = 18000000 / 4608000 =$3.906 expected MPS = PE Ratio * EPS =12.5*3.906 $48.83 The company share holder will get capital appriciation of 48.83-46.88 =1.95 per share agains the action of share buy back. b) if company gets debt from externel with 6% to Buy ack the cost of buy back 192000*46.88=$9000960 the interst on this 6% = $9000960*6% =540058 then EPS = (18 Million -540058)/ ( 4.8million -192000) =  17459942 / 4608000 =$3.79 expected MPS = PE Ratio * EPS =12.5*3.79 $47.38 the interst on this 6% = $9000960*6% =540058 then EPS = (18 Million -540058)/ ( 4.8million -192000) =  17459942 / 4608000 =$3.79 expected MPS = PE Ratio * EPS =12.5*3.79 $47.38 EPS = (18 Million -540058)/ ( 4.8million -192000) =  17459942 / 4608000 =$3.79 expected MPS = PE Ratio * EPS =12.5*3.79 $47.38 The company share holder will get capital appriciation of 47.38-46.88 =$0.5 per share agains the action of share buy back. The company share holder will get capital appriciation of 47.38-46.88 =$0.5 per share agains the action of share buy back.

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